Judge blocks North Carolina attempt to get Amazon sales data

A federal judge has ordered North Carolina to back off its requests for Amazon …

Like many states, North Carolina collects a “use tax” on its residents' out-of-state purchases; it's essentially a sales tax, and is charged at the same rate. As Internet commerce took off in 1999 and more money went out of state, North Carolina moved the use tax from a separate form and put it right in the middle of an individual's tax return. To be extra helpful, the state also provided a table that filers could use to estimate how much tax they owe. After all, who has a handy list of every item they ordered through a catalog or over the Internet for a given year? In 2009, the tax was expanded to cover digital purchases of music, movies, and books.

The state estimates that each resident owes 0.0675 percent of taxable income to cover the tax (those who don't want to accept this estimate are free to enter their own number, but lying about the amount opens you to an audit). This is pretty low—with $45,000 of taxable income, the use tax is $30—but it can still be hard to get people to pay up when most residents consider out-of-state purchases to be tax-free.

So North Carolina has been auditing large out-of-state retailers, most notably Amazon. These retailers cannot be required to collect the use tax unless they have a physical presence in the state, but some do voluntarily as a service to their customers. North Carolina wants to make sure that it's getting its fair share from Amazon purchases, so it asked Amazon in December 2009 to turn over seven years of customer data. If Amazon shipped a product to a North Carolina address, the state wanted to know about it.

North Carolina's estimated use tax table

Amazon complied with the request, and even included the Amazon Specific Identification Number for every purchase, so that the state would know the name of every item. Crucially, however, Amazon left out names, addresses, phone numbers, and other identifying information. Because the state claimed to be looking into Amazon's finances and not those of its residents, this should have been enough information to satisfy the government.

It was not. On March 19, 2010, the state Department of Revenue requested further information from Amazon, this time asking for names and addresses. Although the state said it did not need or want specific item information, and that it had removed the initial Amazon database dump from its computers, it continued to hang onto the CDs holding this information. Combining that information with names and addresses would allow the state to see a person's entire seven-year Amazon purchase history.

Amazon sued in Washington state, asking a federal judge to block North Carolina's request on First Amendment grounds. It did not object to the state's request for tax information, but it refused to turn over personally identifying information so long as the state could link this to individual purchases.

In a new ruling, Judge Marsha Pechman agreed with Amazon. “The First Amendment protects a buyer from having the expressive content of her purchase of books, music, and audiovisual materials disclosed to the government,” wrote Pechman. “Citizens are entitled to receive information and ideas through books, films, and other expressive materials anonymously... The fear of government tracking and censoring one's reading, listening, and viewing choices chills the exercise of First Amendment rights."

It's a victory for Amazon and the American Civil Liberties Union, which also intervened in the case, but it's not a blanket ban on turning over names and addresses. Instead, the judge said that the request violates the First Amendment “only as long as the DOR [Department of Revenue] continues to have access to or possession of detailed purchase records obtained from Amazon.”

If the state destroys the original dataset, Amazon would have to comply with a further request to turn over names, addresses, purchase amounts, and a general product category ("books," etc.).